2015 (1) TMI 1138 - HC - VAT and Sales Tax

Notice for reassessment issued u/s 21(2) of U.P. Trade Tax Act Grant of exemption on sale of books from payment of trade tax as per Notification No.TT-2-63/XI-9(116)/94-U.P. Act-15/48-Order-95 dated 16th January, 1995 Held that - There has been a total non-application of mind - the mere fact that the petitioner is importing ink for the purpose of importing books does not lead to any conclusion that the printing of books is for the purpose of execution of a works contract - there must be more material other than the purchase of ink to come to a prima facie satisfaction that the purchase of ink was for the execution of a works contract - mere purchase of ink is not sufficient to hold that the petitioner was engaged in the execution of a works contract - the order of authorization does not indicate that the authority had perused the terms and conditions of the contract, which led him to believe that the contract was nothing else but a works contract and was not a contract for the publication of books - The reasons given by the authority in the authorization order is, that since there exists a contract between the petitioner and the State Government, therefore, it is presumed that it is a works contract - On such presumption, notices under Section 21(2) of the Act cannot be issued nor can authorization be granted for reassessment. The contract clearly indicates that it relates to printing and supply of printed material and is not a works contract - works contract is normally done on the basis of specification of printing given by the buyer, which in the instant case is lacking - there is nothing on record to indicate that the petitioner is executing the printing of the books as a works contract for a buyer - the foundational requirement of sub-section (1) of Section 21 of the Act for reopening the assessment is lacking - The reason to believe that income had escaped assessment is not based on any tangible material and the reasons to believe that has been formed that some income had escaped assessment is not based on any relevant material nor there is a live link between the formation of the belief and the material available before the authority - in the absence of a vital link having not being established between the reasons and the evidence before the authority, the reason to believe for reopening the assessment was not given in good faith but was based on extraneous or irrelevant consideration - the reasons recorded is not based on any material evidence and the order of authorization and the consequential notice issued for reassessment cannot be sustained Decided in favour of petitioner assessee.

Issues Involved:
1. Whether the petitioner is engaged in the execution of a works contract.
2. Validity of the reassessment proceedings initiated under Section 21 of the U.P. Trade Tax Act.
3. Whether the purchase of ink from outside the state for printing books constitutes a works contract.
4. Requirement of tangible material for forming a "reason to believe" for escaped assessment.

Issue-wise Detailed Analysis:

1. Whether the petitioner is engaged in the execution of a works contract:
The petitioner argued that they are involved in the publication and sale of books, not in the execution of a works contract. The agreement between the petitioner and the State Government specifies that the petitioner is responsible for publishing and selling the books, paying a royalty to the State Government. The contract does not indicate that the petitioner has entered into a works contract. The court found that the mere purchase of ink for printing books does not lead to the conclusion that the petitioner is executing a works contract. The necessary ingredients for a works contract as defined under Section 2(m) of the Act are lacking.

2. Validity of the reassessment proceedings initiated under Section 21 of the U.P. Trade Tax Act:
The court examined whether the Additional Commissioner had valid reasons to authorize the reassessment. The initial assessment had granted exemption from payment of trade tax based on Notification No.TT-2-63/XI-9(116)/94-U.P. Act-15/48-Order-95 dated 16th January 1995, which exempted the sale of books from trade tax. The court held that the Additional Commissioner had not provided cogent or valid reasons for reopening the assessment. The reasons recorded were not rational, genuine, or relevant, and thus, the permission granted for reassessment was deemed illegal.

3. Whether the purchase of ink from outside the state for printing books constitutes a works contract:
The State argued that the purchase of ink for printing books indicated that the petitioner was engaged in a works contract, which is taxable under Section 3F of the Act. However, the court found that the mere purchase of ink is insufficient to conclude that the petitioner was executing a works contract. There must be more material evidence to establish a prima facie case for a works contract. The court emphasized that the terms and conditions of the contract did not suggest that the petitioner was executing a works contract but rather involved in the printing and supply of printed material.

4. Requirement of tangible material for forming a "reason to believe" for escaped assessment:
The court reiterated that the foundational requirement for reopening an assessment under Section 21 of the Act is the existence of a "reason to believe" that income had escaped assessment, which must be based on tangible material. The belief must have a rational connection and a direct nexus with the material available. The court found that the authorization order lacked such tangible material and rational connection. The reasons recorded were not based on any material evidence, and thus, the reassessment proceedings were not initiated in good faith but based on extraneous or irrelevant considerations.

Conclusion:
The court concluded that there was a total non-application of mind by the authority in granting permission for reassessment. The reasons for reopening the assessment were not based on any tangible material or relevant evidence. Consequently, the impugned order of authorization and the consequential notice for reassessment were quashed, and the writ petition was allowed.

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